Crowdfunding: A new cover for money laundering

We’ve all seen them shared across our social media circles: the emotional stories of people and charities in need, the heartfelt pleas for help in funding a startup or pet project, and then a link to a webpage where we can donate to lend a financial hand.

In most cases these stories are legitimate and the crowd-sourced funds are used to benefit those who have encountered illness or tragedy or who are determined to finance their next big project; however, in a growing number of cases, crowdfunding websites are being used for illicit purposes—including money laundering.

First gaining popularity in the early 2000s, crowdfunding is a way of soliciting financial contributions from people around the globe through an online platform. The most well-known sites today include Kickstarter, GoFundMe and IndieGoGo. There are several types of crowdfunding, including these most common ones:

Rewards-based crowdfunding, which gathers collections to fund projects, business ventures or personal causes (e.g., raising money to fund production of an amateur singer’s album)

Debt-based—or P2P—crowdfunding, where people can apply to the platform for unsecured loans that they must then repay with interest

Donation-based crowdfunding, which allows small organizations and even individuals to solicit donations for a variety of causes

Because crowdfunding sites are easily accessible, simple to use, and still relatively new (and therefore don’t necessarily yet have advanced fraud controls or due diligence practices in place), they may be seen as an ideal avenue to launder money and commit other financial crimes. For example, someone funding a personal bank account with checks and cash deposits from foreign businesses and unidentified individuals then uses the money to invest in a fictional project or service collecting donations via a crowdfunding site. It’s also possible for individuals to receive deposits from a crowdfunding site and to then structure withdrawals of cash from that account.

In a more specific example, someone wanting to purchase illegal products or materials, such as narcotics, could pose as an investor and crowdfund a fake startup company actually owned by the drug distributor. The buyer would, in turn, receive the narcotics and ‘equity’ in the sham startup.

FinCEN reports that the number of suspicious activity reports (SARs) filed that mention crowdfunding has increased by 171% from 2013 to May 2015. Of the SARs filed from January 2010 to May 2015 that mention crowdfunding activities in the narrative, money laundering, other suspicious activities and fraud were the most commonly indicated suspicious activity category, representing 35%, 36% and 23% of these reports respectively. Other suspicious activity categories included structuring, terrorist financing, and identification documentation.

While the volume of SARs filed that involve crowdfunding is not large, the transaction amounts reported totals a whopping $27,915,574. The majority of these SARs filed by money services businesses (MSBs) related strictly to crowdfunding transactions, while in reports filed by banks the crowdfunding was mostly indicated as being part of a greater case of suspicious activity.

Suspicious activity related to money laundering included:

Deposits from crowdfunding sites being followed by structured cash withdrawals

Deposits received from multiple accounts and then payments immediately submitted to crowdfunding sites

Personal accounts receiving deposits and checks from unidentified people and foreign businesses, with funds then being transferred to crowdfunding sites

In the coming years it’s almost certain that crowdfunding sites will continue to be an attractive option for criminals wanting to launder money. Financial institutions should be cautious and take steps to detect this type of illicit activity early. Our AML solution is a perfect line of defense. Contact us to find out how our solution can help protect your organization.

About Andrew Simpson

Andrew Simpson (LinkedIn | Twitter) is Chief Operating Officer at CaseWare RCM and has more than 20 years of experience building businesses in the fields of information systems audit and security, data analytics, Anti-Money Laundering and forensics. He is a regular contributor to conferences and a recognized thought leader in financial crime management.